It is not quite up there with the infamous quip that Lloyd Blankfein, the then chief executive of Goldman Sachs, made during the financial crisis when he claimed investment banks, the ultimate bastions of capitalism, were doing “God’s work”.
But AIB chief executive Colin Hunt suggested last month, on a call with stock market analysts, that banks are currently serving a higher purpose as they increase lending costs at a time when the European Central Bank (ECB) is raising official interest rates, in an effort to tackle soaring inflation.
“Monetary policy,” he said, referring to central bank decisions on interest rates, “becomes ineffective unless the financial system plays its role in transmitting monetary policy.”
He is, of course, correct – even if that is squeezing borrowers at a time when they are dealing with the cost-of-living crisis. The whole point of the ECB raising its main lending rate from zero to 2.5 per cent in the past six months is to make borrowing more expensive, encourage saving, and reduce demand for goods and services – in the hope that inflation, which hits the less well off the most, will ease.
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It is easy to forget that in the period between 2009 and July of this year we were living in an era of abnormally low interest rates, as the ECB tried to boost inflation rates that were stubbornly below its target of about 2 per cent.
Economists largely see neutral ECB lending rates at somewhere between 1.5 per cent and 2 per cent. We’re a little above that now and financial markets currently expect the ECB to move its lending rates to 3.5 per cent by the middle of next year, even though recession is threatened.
AIB has, so far, led the three Irish mainstream banks in raising lending rates since the ECB started to move, adding a total one percentage point across to the cost of its new fixed-rate mortgages.
The bank – and its rivals – have been tardier, however, at increasing rates for savers as the ECB has moved since July from charging banks a negative rate of minus 0.5 per cent for deposits stored with it to paying them a rate of 2 per cent.
Household deposits currently stand at close to ¤150 billion, the highest they have ever been, turbocharged by savings during the pandemic. Most of them are earning little or nothing. The 0.5 per cent rate that AIB is now offering for savers willing to tie up more than ¤15,000 on deposit for 12 months is the best out there.
Make no mistake: the profit growth that banks are currently forecasting is more down to what they are earning from keeping deposit rates low than raising borrowing rates. Faithful transmission of ECB monetary policy must also involve banks raising deposit rates - even if Irish banks are awash with more cash these days than they know what to do with.